UNITED STATES OF AMERICA
In the Matter of the Application of
For Review of Disciplinary Action Taken by the
ORDER DENYING REQUESTS FOR WITHDRAWAL OF THE COMMISSION AND FOR A STAY
On February 5, 2001, the National Association of Securities Dealers, Inc. ("NASD") disciplined John Montelbano and Gerard McMahon, formerly associated with Monitor Investment Group, Inc., ("Monitor") a former member firm (collectively, the "Applicants").1 On February 27, 2001, Applicants sought Commission review of the NASD's disciplinary action. Inaccordance with our briefing schedule order, Applicants filed joint briefs on May 24, 2001 and on July 27, 2001.
By letter dated August 23, 2001, Applicants asked that the Commissioners "withdraw themselves from reviewing the appeal in this proceeding." 2 Applicants assert that the Commission cannot provide a "fair and impartial review." Applicants also renew their request for a stay.3 The NASD has elected not to respond to Applicants' filing. We have determined to deny both requests.
Applicants' request that we withdraw from considering their appeal is both untimely and unsupported. We previously have held that Section 556 of Title 5 of the United States Code, which governs the disqualification of decision makers in administrative proceedings, "contemplates that, before an agency determines the question of bias involving a presiding officer, a good faith, timely and sufficient affidavit showing personal bias and prejudice must be filed."4 We added, "[T]imeliness in the filing of affidavits of bias and prejudice is a most important matter of substance."5 Applicants sought our review in February and pursued their appeal. They waited for several months after they invoked our jurisdiction, and nearly a month after they filed their last brief, to assert their claim of prejudice. Applicants also have not filed the requisite affidavits in support of their recusal request.
Applicants' assertions, moreover, do not suggest bias or prejudice on the part of the Commission or of any individual Commissioner. Applicants note that, on June 14, 2000, the U.S. Attorney for the Southern District of New York announced the arrest of 150 people, resulting in 120 indictments. At thattime, according to Applicants, the U.S. Attorney stated that the arrests resulted from "an unprecedented collaboration by the FBI, SEC and NASD that dates back to 1994."
Applicants draw two conclusions from this information. First, they claim that, since the investigation began in 1994, which was sixteen months before Applicants joined Monitor, "the FBI, SEC and NASD knew we had nothing to do with this manipulation from the beginning, and we were never involved as charged." We understand Applicants to assert that, since they were not employed by Monitor in 1994, they could not have been among the original targets of the joint investigation. By Applicants' own reckoning, however, the investigation was conducted between 1994 and 2000, which might reasonably encompass conduct that occurred in 1996 or later, the periods charged by the NASD.
Applicants further conclude from the U.S. Attorney's announcement that the Commission was "involved from the beginning, so there is no way [Applicants] could ever have a review without prejudice."6 Applicants argue that, because we participated in the joint investigation, we cannot provide a fair review of the NASD's disciplinary action.
Courts repeatedly have held that the mere fact that an agency both investigates and adjudicates alleged violations does not demonstrate bias or prejudice. Courts have permitted agencies to investigate, file complaints resulting from the investigation, receive evidence, and judge the resulting proceedings.7
For example, in Blinder, Robinson & Co. v. SEC,8 the court rejected petitioner's contention that, because the Commission had rejected his settlement offer, it had prejudged the issue of what administrative sanctions should be imposed on petitioner. The court stated:
It would be a strange rule indeed that inferred bias on such a tenuous basis . . . . To do so would manifest profound disrespect for Congress' deliberately structuring agencies as (typically) multi-member bodies, with staggered terms and with requirements that the President appoint a certain number of members from the political party other than his own. To give credence to Mr. Blinder's dark suspicion of bias notwithstanding this carefully crafted structure would flout what Justice White, in writing for the [Supreme] Court in Withrow [v. Larkin], called "a presumption of honesty and integrity" on the part of those who serve in office.9
In FTC v. Cement Institute,10 the Federal Trade Commission ("FTC") issued a cease-and-desist order against seventy-four cement manufacturers after it had conducted a full investigation and reported to Congress and the President that the manufacturers' pricing system was the equivalent of an illegal price-fixing restraint of trade. One of the manufacturers complained that the FTC's prior investigation and report demonstrated that the agency was biased and had prejudged its subsequent proceeding. The Supreme Court rejected this assertion, stating that "the fact that the [FTC] had entertained such views as the result of its prior ex parte investigations did not necessarily mean that the minds of its members were irrevocably closed on the subject of the respondents'. . . practices."11
Here, the relationship between the investigation and this proceeding against Applicants is substantially more attenuated than those in Blinder and Cement Institute. While we participated in an investigation with the NASD, among others, the NASD, not the Commission, instituted and tried this proceeding and determined to impose certain sanctions. Our involvement in this proceeding began only with Applicants' petition for review. To accept Applicants' argument would undermine the strong presumption of "honesty and integrity" accorded the Commission and its members in performing the Commission's diverse functions.12
Our review of disciplinary sanctions imposed by self-regulatory organizations ("SROs"), like the NASD, on their members and the members' associated persons is central to the statutory scheme of the Securities Exchange Act of 1934. Congress directed the Commission to review disciplinary actions to determine whether (a) an applicant engaged in the acts or practices found by the SRO, (b) those acts or practices constitute the particular violations of the particular provisions of the federal securities laws or SRO rules as found by the SRO, and (c) those provisions were applied in a manner consistent with the Exchange Act. The Commission further is required to determine whether, consistent with "due regard for the public interest and the protection of investors, the SRO's choice of sanctions is "excessive or oppressive" or a "burden on competition."13
In 1973, Congress found Commission review of disciplinary proceedings is a "useful method of guarding against the capricious and arbitrary exercise" of power.14 Congress further observed that Commission review of NASD action is a necessary predicate to judicial review. "No provision of the Exchange Act confers jurisdiction upon the courts to directly review the self-regulatory activities of" the NASD, including disciplinary actions. "As a consequence of the Commission'srather extensive power to review NASD action and inaction, parties aggrieved by NASD action have indirect access to the courts."15
Applicants reiterate many of the challenges to the NASD's proceedings that are raised in their briefs on the merits.16 We will consider these challenges in our review of the merits of this proceeding.
Applicants renew their motion for a stay. Applicants made many of the same arguments in their earlier motion. While any final decision on the merits of this proceeding must await our consideration of the record here, we see no reason to reverse that earlier Order Denying Stay. In determining whether to grant a stay, the Commission considers: (1) whether there is a strong likelihood that the Applicants will succeed on the merits oftheir appeal; (2) whether the Applicants will suffer irreparable injury without a stay; (3) whether there will be substantial harm to the public if the stay were granted; and (4) whether the stay will serve the public interest.17
The NASD's comprehensive decision marshals a considerable amount of evidence that Applicants violated both the federal securities laws and the NASD's rules. We recognize that Applicants currently are unable to work in the industry, but that financial detriment does not rise to the level of irreparable injury,18 and is in any event outweighed by the necessity for protecting the public interest.19
Accordingly, IT IS ORDERED that the request of John Montelbano and Gerard McMahon that the Commission withdraw from review of their appeal be, and it hereby is, denied; and it is further
ORDERED that the renewed request of John Montelbano and Gerard McMahon for a stay of the bars imposed by the National Association of Securities Dealers, Inc., pending Commission review, be, and it hereby is, denied.
By the Commission.
Jonathan G. Katz
|1|| The NASD found that Applicants violated antifraud provisions in connection with a 1996 scheme to manipulate the price and supply of the common stock of Accessible Software, Inc. The NASD also found that Applicants failed to respond truthfully and completely to NASD staff inquiries. The NASD further found that Montelbano failed to supervise Monitor salespersons.
The NASD barred Montelbano from associating with any member firm in any capacity and imposed a fine of $40,000 for the manipulation violation, barred him and imposed a fine of $10,000 for the supervision violation, and suspended him for two years and imposed a fine of $40,000 for the failure to respond violation. The NASD barred McMahon from associating with any member firm in any capacity and imposed a $50,000 fine for the manipulation violation, suspended him for a period of two years, and imposed a $40,000 fine for the failure to respond violation.
|2||Applicants ask that the Commission remand these proceedings "to a United States Federal Court." The Commission does not have that authority. Section 25(a)(1) of the Securities Exchange Act of 1934 instead provides that a "person aggrieved by a final order of the Commission" may seek review in the United States Court of Appeals for the District of Columbia Circuit or in the circuit in which the person resides.|
|3||The Commission previously denied Applicants' request for a stay. Michael Galasso, Jr., Admin. Proc. File No. 3-10424, Order Denying Stay (Mar. 15, 2001) ("Order").|
|4||Augion-Unipolar Corporation, 44 S.E.C. 438, 439 (1970).|
|5||Id. at 440.|
|6||None of the Commissioners currently serving on the Commission was in office in 1994.|
|7||The Supreme Court found that it is "very typical for the members of administrative agencies to receive the results of investigations, to approve the filing of charges or formal complaints instituting enforcement proceedings, and then to participate in the ensuing hearings. This mode of procedure does not violate the Administrative Procedure Act, and it does not violate due process of law." Withrow v. Larkin. 421 U.S. 35, 56 (1975).|
|8||837 F.2d 1099 (D.C. Cir. 1988).|
|9||837 F.2d at 1106-07 (citation omitted).|
|10||333 U.S. 683 (1948).|
|11||Id. at 701.|
|12|| See text accompanying n.8, supra. Applicants further argue that the NASD prosecuted its disciplinary action against them to provide some form of camouflage for a continuing FBI investigation. They further assert that the NASD Hearing Panel delayed issuing its decision to permit the FBI toobtain the cooperation of a witness, Jeffrey Pokross, in recording conversations with other persons under investigation. Applicants assert that the NASD Hearing Panel "had to . . . put the burden of guilt on us, so that Pokrass [sic] could be trusted by the other criminals so that the operation would be successful. We became the smokescreens."
The NASD's prosecution or timing of its disciplinary action does not suggest bias or prejudice on the part of the Commission. Moreover, any delay in issuing the NASD's decision may equally be attributed to the size and complexity of this proceeding. The NASD filed its complaint in this matter in January 1998. Applicants were only two of eighteen persons named in the complaint. The NASD conducted its hearing over several days in December 1998 and January and February 1999. The record in this proceeding before the Hearing Panel exceeded 19,000 pages. In December 1999, the Hearing Panel issued a 130-page decision with respect to eight persons, including Applicants.
|13||Exchange Act Section 19(e), 15 U.S.C. § 78s(e).|
|14||Securities Industry Study, Report of the Subcommittee on Securities, Committee on Banking, Housing and Urban Affairs, 93d Cong. 1st Sess. 152 (1973) ("Industry Study").|
|15|| Industry Study at 210. The Supreme Court has held that where Congress mandates that an agency hear certain types of proceedings, disqualification cannot be permitted to prevent the only tribunal with power to act from performing its duties. In Cement Institute, the Supreme Court refused to disqualify the entire membership of the FTC, explaining that, if all of the FTC commissioners were disqualified, neither the FTC nor any other administrative agency could act on the complaint. It elaborated:
Congress has provided for no such contingency. It has not directed that the Commission disqualify itself under any circumstances, has not provided for substitute commissioners should any of its members disqualify, and has not authorized any other governmental agency to hold hearings, make findings, and issue cease-and-desist orders in proceedings against unfair trade practices.
333 U.S. at 701.
|16||Applicants assert that they have done nothing wrong and point to their unblemished disciplinary histories. They assert that the NASD's procedures were unfair. Applicants complain that the NASD refused their request to produce Pokross as a witness at their hearing. They assert that the NASD based its findings on hearsay and that the NASD should have questioned the credibility of several witnesses because those witnesses subsequently were indicted, pled guilty, or were disciplined by the NASD. Applicants also claim that there were instances of prosecutorial misconduct by the Hearing Officer and an NASD Regional Attorney.|
|17||See Cuomo v. Nuclear Regulatory Comm'n, 772 F.2d 972, 974 (D.C. Cir. 1988); Al Rizek, Exchange Act Rel. No. 41972 (Oct. 1, 1999), 70 SEC Docket 2374, 2375.|
|18||William Timpinaro, Exchange Act Rel. No. 29927 (Nov. 12, 1991), 50 SEC Docket 283, 290 (and cases cited therein).|
|19||Associated Securities Corp. v. SEC, 283 F.2d 773, 775 (10th Cir. 1960).|
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